Bulls Return to Uralkali on Ruble’s Plunge, Potash Prices #potash

After the breakup of a joint marketing venture and subsequent plunge in potash prices wiped out all of OAO Uralkali (URKA)’s buy ratings last year, analysts are turning bullish again as the weakening ruble and a rebound in demand boosts the Russian producer’s profit outlook.

Six analysts rate Uralkali a buy, while 13 recommend holding the stock and three advise selling, according to data compiled by Bloomberg. The London-traded shares ended a four-month streak of losses in October as bullish ratings outnumbered bearish ones for the first time since since July 2013.

The shift comes as Uralkali, the world’s largest potash supplier, rebounds from a 38 percent drop this year. The shares sell for 12.1 times projected earnings, below the average multiple of 17.4 among 50 global peers, data compiled by Bloomberg show. Potash prices plunged 23 percent in five months after the breakup of the joint venture with the Belorussian state-controlled producer in July 2013. Prices for Uralkali’s supplies next year are forecast to increase 10 percent, according to BCS Financial Group.

“Uralkali is incredibly cheap, even taking into account all of the risk associated with Russia,” Oleg Petropavlovskiy, an analyst at BCS in Moscow, said by phone on Nov. 3. “Demand for potash is increasing globally and prices are expected to accelerate, helping the stock, which also benefits from the ruble’s devaluation. The market still underestimates the potential for gains in the stock.”

Ruble’s Plunge

Petropavlovskiy, whose recommendations on Uralkali have produced the best returns over the past year among the analysts who cover it, raised the stock to buy from hold on Oct. 23.

Uralkali lost all its buy recommendations after the producer broke up the trading venture with Belarus in July 2013 and said it would operate at full capacity to regain market share, triggering a price war in the $20 billion global potash market. Now analysts are turning more bullish as a plunging ruble, the stock’s low valuation and increasing demand boost the outlook for the Berezniki, Russia-based company.

Uralkali, which makes more than four-fifths of its sales outside Russia, is benefiting from the ruble’s 25 percent plunge this year as the weaker currency boosts its foreign-denominated revenue. A 10 percent drop in the ruble against the U.S. dollar boosts earnings before interest, taxes, depreciation and amortization by 6 percent, Vladimir Sergievskiy, an analyst at Barclays Plc in London, said by phone on Nov. 3.

International Sanctions

While the stock’s valuation has become more attractive, Sergievskiy said it’s still a risky investment as Russia remains under international sanctions linked to the Ukraine conflict. He rates Uralkali the equivalent of hold.

“We don’t see any meaningful catalyst for the stock near-term, while the risk of negative geopolitical sentiment is still there,” he said. The potash producer has not been directly targeted by any of the measures.

The U.S. and its allies have imposed financing, trade and technology restrictions to punish President Vladimir Putin for supporting a rebellion in eastern Ukraine, a claim he denies. Gross domestic product is forecast to increase 0.3 percent this year, the weakest since 2009. Banks including Barclays, JPMorgan Chase & Co. and Morgan Stanley forecast that Russia will fall into a recession next year, according to estimates compiled by Bloomberg.

Uralkali expects to sign a new supply contract with China by the end of this year and anticipates a “higher price” than the $305 per ton under the current agreement, Chief Executive Officer Dmitry Osipov said in a Sept. 15 interview with Bloomberg television in New York.

“Demand for potash is picking up and so does the price,” Rajesh Singla, analyst at Societe Generale in Bangalore, India, said by phone on Nov. 3. “The next potential catalyst for the stock is the price on Uralkali’s future supplies to China.”

Uralkali sees North American demand rising to match the record level in 2010 as farmers boost production of crops, the company said in an Aug, 28 statement. Consumption will be sustained as farmers replenish declining nutrient levels in the soil after crop production that reached an all-time high this year, according to the statement.

The company’s revenue is expected to increase 9.4 percent to $3.3 billion in 2015 after falling 9.7 percent to $3 billion this year, according to the mean estimate of 13 analysts surveyed by Bloomberg.

“Uralkali does look attractive even as there is a huge amount of uncertainty,” Societe Generale’s Singla said. “The major risk for the stock is that the Ukraine crisis remains unsolved.”

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Richard Richtmyer, Matthew Oakley